agg demand¨

Aggregate demand	The total spending on goods and services in  a period of time at a given price level Consumption The total spending by consumers on domestic goods and services Durable and non durable Investment The addition of capital stock to the economy Replacement investmant Induced investment Government spending Depends on policies Net export Goods and servcices bought and sold by foriegners
Changes in the components of aggregate demand	Changes in income Changes in interest rates If interest rates change there is less borrowing and consumption will fall If interest rates fall people will borrow more Changes in wealth Made up of the assets peopkle own 2 main  factors for wealth A change in the housing market A change in the stocks and shares Changes in consumer confidence If people ar optimistic about the future they will spend more Household indeptness The extents to which households are willing and able to borrow money affect consumption. If interest rates are low and it is easy to borrow and spend increasing AD. If interest rates rise household will have to spend more to re-pay their loans and mortgages and spending will drop.
What causes changes in investment	Interest rates People will borrow money Changes in national income As national ncome rises more demand then more investments into new plants Tech changes Expextations Planning for the future
What causes changes in gov spending	Based on policy
What casuses changes in net export	What causes changes in Net Exports? 1 Changes in domestic national income- An increase in Y puts pressure to decrease 2 Changes in foreign income- When foreign incomes rise rightward preasrure is placed on AD because foreigners buy exports. 3 Relative currency values- If domestic currency has a high value leftward pressure is placed on AD because to foreigners goods/services seem expensive. 4 Trade policies Protectionist policies put leftward pressure on AD whereas free-trade policies place rightward pressure on AD. 5 Relative inflation rates among trading partners Hight inflation rates make goods seem expensive to foreigners.
Fiscal policy	Fiscal policy- the set of governments policies relating to its spending and taxation rate. Direct taxes-taxes on income Indirect taxes- taxes on goods and services Money supply= refers to the amount of money in circulation at a given period of time Interest rate= Base rate/discount rate/prime rate-the price charged to borrow money. The rate charged by the central bank to other banks Expansionary fiscal policy (Encourage consumption-shift AD right) Lower income tax to increase disposable income Lower corporate taxes to encourage investment Increase government spending to improve or increase public services Contractionary fiscal policy (Discourage consumption-shift AD left) Raise corporate taxes Decrease government spending
Monetarty polic	The set of official policies governing the supply of money in the economy and the level of interst rates in an economy Expansionary monetary policy Decrease the interest rate Increase the money supply Decrease the reserve ratio Buy back governments bonds Contractionary monetary policy Increase the interest rate Decrease the money supply Increase the reserve rate Sell gov bonds.

S 14 aggregate demand work sheet

S14: Aggregate Demand

Objective 1: Distinguish between demand and aggregate demand (AD).

Define demand-

the willingness and ability to buy a product at a given time.

Define aggregate demand-        

Total spending on goods and services in a period of time at a given price level.

 Microeconomic demand curve                         Macroeconomic demand curve

p

                                                                     average

                                                                   price level

                                                GDP price deflator                                                      AD

           Quantity                                          Real output=real gdp=national income=y

Objective 2: Define and describe the components of aggregate demand. *think GDP expenditure approach here.

Consumption	The total spending by consumers on domestic goods and services ·         Durable Goods-any good that’s going to be consumed over a period of time. ·         Non-Durable Goods- are goods such as rice, toilet paper and newspapers that are used immediately or in a relatively short period of time.
Investment	Defined as the addition if capita stock. Investment is carried out by the firms and there are two types: 1. Replacement investment- firms spending to maintain the productivity if their existing capital. 2. induced investment occurs when firms spend on capital to increase their output to respond to higher demand in the economy. ·         Capital Stock- includes all goods that are made by people and are used to produce other goods or services such as factories, machines, offices or computers.
Government spending	Governments at a variety of levels (federal, state/provincial) spend on a wide variety of goods and services; health, education, law and order, transport, social security, housing and defence. Depends on gov. policies.
Net exports (X-M)	Export revenues minus import expenditures (the figure can be either positive (when revenues exceed expenditure) or negative (when expenditure exceeds revenues)) If net exports is pistive it will add to AD, if it is negative, it will reduce AD

Objective 3- Explain the determinants of the components of AD.

What causes changes in Consumption?
1	Changes in income-	When national income goes up, aggregate demand goes up.
2	Changes in interest rates-	When interests rates goes up, aggregate demand goes down
3	Changes in wealth-	An increase in wealth results in a rightward shift of the AD curve Wealth goes up demand up
4	Changes in expectations /consumer confidence-	Optimism about the economic future results in more spending now: ogton measure by consumer confidence index
5	Household indebtedness-	The extents to which households are willing and able to borrow money affect consumption. If interest rates are low and it is easy to borrow and spend increasing AD. If interest rates rise household will have to spend more to re-pay their loans and mortgages and spending will drop.

What causes changes in Investment?
1	Changes in Interest Rates	When it goes u demand goes down
2	Changes in level of National Income	If it goes up demand goes up
3	Technological Changes	When it goes up demand goes up
4	Changes in expectations /business confidence-	When it goes up demand goes up

What causes changes in Government Spending?
1	Changes in policy-	Dependent on policy

What causes changes in Net Exports?
1	Changes in domestic national income-	An increase in Y puts pressure to decrease
2	Changes in foreign income-	When foreign incomes rise rightward preasrure is placed on AD because foreigners buy exports.
3	Relative currency values-	If domestic currency has a high value leftward pressure is placed on AD because to foreigners goods/services seem expensive.
4	Trade policies	Protectionist policies put leftward pressure on AD whereas free-trade policies place rightward pressure on AD.
5	Relative inflation rates among trading partners	Hight inflation rates make goods seem expensive to foreigners.

Determinants at a Glance

C ∆s in Y ∆s in i (interest rate) ∆s in consumer confidence ∆s in wealth Household indebtedness

I ∆s in Y ∆s in i (interest rate) ∆s in business confidence Technological changes

G ∆s in government policies

X-M ∆s in Y ∆s in foreign Y ∆s in exchange rates ∆s in trade policies Relative inflation rates

Objective 5: Illustrate shifts of the AD curve.                                                                       AD shifts right/left/uncertain

1	Congress cuts taxes	right
2	Interest rates rise	left
3	Government spending to increase; president promises no increase in taxes.	right
4	Consumer confidence jumps	right
5	Stock market collapses	left
6	Productivity rises for fourth straight year	right
7	Value of the pound increases sharply	left

Objective 7: Explain how governments can use monetary and fiscal policy to alter the level of AD in an economy.

Fiscal policy- the set of governments policies relating to its spending and taxation rate.

Direct taxes-taxes on income

Indirect taxes- taxes on goods and services

Money supply= refers to the amount of money in circulation at a given period of time

Interest rate= Base rate/discount rate/prime rate-the price charged to borrow money. The rate charged by the central bank to other banks

Expansionary fiscal policy

(Encourage consumption-shift AD right)

Lower income tax to increase disposable income

Lower corporate taxes to encourage investment

Increase government spending to improve or increase public services

Contractionary fiscal policy

(Discourage consumption-shift AD left)

Raise corporate taxes

Decrease government spending

Expansionary monetary policy

Decrease the interest rate

Increase the money supply

Decrease the reserve ratio

Buy back governments bonds

Contractionary monetary policy

Increase the interest rate

Decrease the money supply

Increase the reserve rate

Sell gov bonds.

Objective 8- Explain the Nature of a government budget

Government budget-refers to the total spending by all levels of government and is split into three categories

1.       Capital expenditure- includes spending that adds the capital stock of the economy, ie. Upfrading ahighway or school

2.       Current expenditure- on going spenind such as purchases of textbooks or wages to  publice sector employees

3.       Transfer payments-

Gov revenue comes from

Taxes- direct income

Tariffs- taxes on imported goods

Profits- or sales of nationalized businesses

Rent- of gov owned buildings or land

-          Governments lay out their national budgets yearly showing their expected revenues and expenditure this is called the fiscal stance

-          Budget surplus- when governments earns more than it spends

-          Budget deficit- when governments spends more than it earns

-          Balanced budget- when governments earning equal what they spend

To finance or run a budget deficit the government musr borrow money from

a)      Household

b)      Firms

c)       Foreign countries

-          To do this they sell gov bonds

-          People buy bonds as  as a form of saving; they lend money to the government and are eventually paid back along with extra payment

-          The national debt is the sum of budget deficits over time.

Name Kristian Villadsen

The Level of Overall Economic Activity Objectives Organizer

Define Macroeconomics:

Branch of economics that studies decision making for the economy as a whole, ie examining growth

Objective 1: List and explain the five main macroeconomic goals of an economy.

Economic growth	1. a steady rate of increase of national output
Employment	a low level of unemployment
Price stability	a low and stable rate of inflation
External stability	a favorable balance of payments position.
Income distribution	an equitable distribution of income

*The order here is quite logical, if it helps you remember.

Objective 2: Describe and illustrate the circular flow of income model of the economy for a closed (two-sector) economy and an open (four sector) economy with government and financial markets.

Closed (two-sector) micro circular flow model

Factor resource market

Product market

House holds

firms

expenditure

Goods and services

Rent, wages, interest profit

Land, labour, capital, etr

Open (four-sector) macro circular flow model

households

firms

expenditure

income

Investments

exports

Governments spending

Savings

imports

taxes

Notice/Know and understand the relationships!

Leakage Injection

Savings	Foregoing current consumption to allow future consumption -|banks	Investment	An increase in capital stock by firms to expand output -|borrow from banks
Imports	Spending on imports is a leakage -|the money flows out of circulation to foreign firms	Exports	Foreigners spend money to buy domestic products thereby injecting money into an economy
Taxes	Taxes are paid to the government (taking that money out of circulation)	Subsidies	Government spending injects money into the circular, flow.

Define Transfer Payments-

A payment to an individual from the government that does not expect an increase in output

Important Conclusions:

· The economy is in equilibrium when:

LEAKAGES=INJECTIONS

· If leakages rise without a corresponding increase in injections:

THE NATIONAL OUTOUT WILL FALL, THERE WILL BE LESS INCOME CIRCULATING.

· If injections rise without a corresponding rise in leakages:

THERE WILL BE MORE MONEY IN CIRCULATION

Objective 3: Distinguish between the output approach, the income approach and the expenditure approach for measuring national income. [know the different ways GDP is calculated]

*The most common measure of a country’s national income is gross domestic product (GDP).

There are three methods to calculate GDP:

1	The output method	Measures the actual value of the goods and services produced (# 3 on circular flow) Calculated by summing all the value added by all the firms in an economy (making sure not to double count by subtracting input cost) Data usually grouped according to different production sectors: primary, (agriculture, mining), secondary (manufacturing), tertiary (services)
2	The income method	Measures the value of all the incomes earned economy (wages, rent, interest, profits) (#2 on circular flow)
3	The expenditure method	Measures the value of all spending on goods and services in the economy. –Calculated by summing spending by different sectors in the economy (c+i+g+x-m (number 4 of circular flow) Consumption, investment, governments, net exports

National Output = National Income = National Expenditure

How accurate are these statistics? In theory they are always equal, is this really true? Why? Why not?

Presumably accurate depending how develpoe or underdeveloped the country may be

The data comes from may and varied sources so inevitably there are inaccucies leading to imbalances among the final values

Some inaccuracies are due to timing, some are due to collection

Objective 4: Define and distinguish between Gross Domestic Product (GDP) and Gross National Product (GNP)/ Gross National Income (GNI) as measures of economic activity.

GDP- The total value ofof all final goods+services produced in an economy in a given year measured by c+i+g+(x-m)

GDP- may be defines as the total value og all economic activity in a country regardless of who owns the productive assests

Ie. An Indian MNC operating within canadas borders and earning profit towards canadas GDP, not indias.

GNP/GNI-

Is the total income earned by a country’s factors of proudction regardless of where the assets are located?

Formula for GNP/GNI:

GNP= GDP + net property income from abroad (income earned by assets abroad minus income paid to foreign assets operating domestically)

GNI versus NNI: Net national product

NNI=GNI- depreciation of capital stock (capital consumption)

NNI takes into account the depracitate (loss of value) off capital or capital consumption due to:

Wear and tear as machinery is used

Damage to capital equipment

Absolute technology

Objective 5: Define and distinguish between total GDP & GNP/GNI and per capita GDP & GNP/GNI

Per capita:

Total gdp divided by the population

What does looking at per capita statistics allow for that looking at total statistics does not?

Comparison between countries

Objective 6: Define and distinguish between the nominal value of GDP and GNP/GNI and the real value of GDP and GNP/GNI.

Nominal: number (not adjusted for inflation)

real: Number adjusted for inflation (done using the gdp deflator)

Why are ‘real’ values of national income statistics more valuable than nominal values?

Objective 6: Explain the meaning and significance of “green GDP”

Green GDP= GDP-enviromental costs of production

Green GDP is a measure of GDP that ctakes into account any environmental costs incurred from the production of the coods and services included in the GDP figures

China calculated green GDP for 2004 + showed a 3% costs for pollution

Stopped calculating the next year due to arguments

India is discussing calculating green GDP accounts in 2015

Objective 7: Evaluate the uses of national income statistics.

Why are they gathered?

	Act as a report growth been achived
	Gov. uses stats to develop policies
	Economist to stats to develop models and make forecasts
	Business use stats to male forecasts about future demand
	To measure performance of the economy over time (real)
	As a starting point for measuring the welfare of a nations people
	AS a base for comparing different countries

What are the limitations of national income statistics?

Inaccuracies	Dara used to calculate the measure comes from a variety of sources such as tax claims, output data and sales data. Figures tend to become more accurate overtime (after a lag) as they are revised Statisticians try to be as accurate as possible, and in more devoped countries The UN SNA works to improve data
Hidden economy	Unrecorded or under recorded economic activity, informal market -National income accounts only record information formally reported and officially recorded They don’t include do it yourself work or work done at home This is quite significan in devoping countries where much output does not get recorded Also the hidden economic (black market)
Externral costs	Negative externalities of production
Life concerns	GDP ,amu grow because people are working longer hours or taking power holidays
Composition of output	Is it possible that a large part of a countries outpit is in goods that do not benefit consumers -military equipment - in this case it would be hard to argue a higher GPD will raise living standards

Objective 8: Explain and illustrate the business cycle and its phases.

Periodic fluctuations in economic activity measured by changes in real GDP Demonstrates patterns seen in developed countries of periods of rising growth, followed by periods of slowing growth and even falling growth.

boom Recovery

recovery recession

trough

expansion contraction expansion

Long term trends and output gaps

Positive output gap-

the economy is producing above its trend- inflation is likely to be a problem.

Negative output gap-

gap- the economy is producing below its trend- unemployment is likely to be a problem

Objective 10: Calculate nominal GDP from national income data using the expenditure approach.

GDP = C + I + G + (X - M)

C = Household and personal consumption expenditures

I = Gross private domestic investment expenditures

G = Government consumption and gross investment expenditures

X = Expenditures on goods and services exported

M = Expenditures on goods and services imported